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INTRODUCTION TO

CORPORATE FINANCE
Laurence Booth W. Sean Cleary Chapter 23 Working Capital Management: General Issues

Prepared by Ken Hartviksen

CHAPTER 23 Working Capital Management: General Issues

Lecture Agenda
Learning Objectives Important Terms An integrated approach to working capital management Analyzing cash inflows and outflows Working capital management Summary and Conclusions
Concept Review Questions

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Learning Objectives
You should understand:
Why the management of net working capital is critical for the survival of the firm How managing receivables, inventory, and payables is related in an integrated approach to net working capital management How the financing and current asset investment decisions interact to determine a companys overall working capital position How some key financial ratios can be used to analyze a firms net working capital policies

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Important Chapter Terms


Break-even sales growth Cash budget Cash conversion cycle Credit policy Inventory policy Net working capital Operating cycle Payment policy Trade credit Working capital management

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An Integrated Approach to Net Working Capital Management


Working Capital Management - General Issues

Working Capital Management

The way in which a firm manages both its current assets and its current liabilities.

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Good Working Capital Management


Characterized by:
1. The maintenance of optimal cash balances 2. The investment of any excess liquid funds in marketable securities that provide the best return possible, considering any liquidity or default-risk constraints 3. Proper management of accounts receivable 4. An efficient inventory management system 5. Maintaining an appropriate level of short-term financing, in the least expensive and most flexible manner possible.

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Working Capital Management


Importance of Cash Flow Management

Management of the firms cash flow is one of the greatest challenges facing the financial manager:
Exhaustion of liquid resources can leave the firm unable to pay its maturing obligations as they come due (a state of technical insolvencyan Act of Bankruptcy)

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Working Capital Management


Exhaustion of Liquid Resources

Firms can run out of liquid financial resources in a number of ways:


Rapid growth in production and sales, can cause the firm to use up all of its cash pursuing growth, leaving it invested in illiquid assets such as inventories, accounts receivable and net fixed assets.
The surprising thing about this state is that the firm may be highly profitable in an accounting sense, but be on the verge of bankruptcy as it pursues uncontrolled growth in sales.

Continuing to produce inventory in the face of falling sales revenue. Selling products/services for less than their variable cost to produce.

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An Integrated Approach to Net Working Capital Management


The Cash Budget

The monthly cash budget is a management tool used to forecast the timing, magnitude and duration of both cash surpluses as well as deficits.
Table 23-2 ABC's Six-Month Cash Budget

$
Sales Cash inflow Cash outflow Current sales Inventory Operating cash Start cash End cash Required cash Surplus/deficit

1
1,000 1,000 750 0 250 1,000 1,250 200 1,050

2
1,500 1,000 1,125 375 -500 1,250 750 300 450

3
2,000 1,500 1,500 375 -375 750 375 400 -25

4
2,500 2,000 1,875 375 -250 375 125 500 -375

5
3,000 2,500 2,250 375 -125 125 0 600 -600

6
3,500 3,000 2,625 375 0 0 0 700 -700

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An Integrated Approach to Net Working Capital Management


Knowledge of the cash flow cycle of a firm gives the manager an awareness of the dynamics involved in working capital management. The cash flow cycle helps the manager visualize the impact of changes in variables on the cash account:
How increasing sales requires additional investment in inventory How increasing accounts receivable reduces cash How delaying payables preserves cash How speeding collections on A/R improves the cash position

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The Cash Flow Cycle


Working Capital Management - General Issues

Cash and Net Working Capital

The cash flow cycle where cash comes fromhow it is used to finance the operations of the firmand how it is recovered and how it grows over time is a crucially-important part of understanding how a business functions.

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Cash and Net Working Capital


Activities that Increase Cash

Increasing long-term debt Increasing equity Increasing current liabilities Decreasing current assets other than cash Decreasing fixed assets

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Cash and Net Working Capital


Activities that Decrease Cash

Decreasing long-term debt Decreasing equity Decreasing current liabilities Increasing current assets other than cash Increasing fixed assets Paying dividends

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Example of Exhaustion of the Liquid Resources of a New Firm


A simple example of a $1.0 million equity investment in a business levering additional financial resources and the need to finance the growth of the business leaving it exhausted of cash resources.
7 steps to technical insolvency for an otherwise profitable firm.

This Exercise
This exercise reinforces the classic working capital problem illustrated in the text. Demonstrates:
How cash is utilized over time in the firm. How investment in assets such as accounts receivable and inventory deplete cash resources. How the delays in receipt of cash from sales can leave a firm without cash, despite overall profitability.

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The entrepreneur opens a current account in the name of the business.

Cash Flow Cycle


Start

Step 1

Cash Account Balance = $0

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The entrepreneur invests $1,000,000 in equity.

Cash Flow Cycle


Initial Equity Investment

Step 2

Cash Account Balance = $1,000,000

Owner/Shareholders invest and receive common stock


Cash

Balance Sheet

$1m

Common Stock

$1 m

= $1,000,000

_____________________________________ T. Assets $1m T. Claims $1m

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The firm purchases fixed assets.

Cash Flow Cycle


Purchase of $500,000 Fixed Assets

Step 3

Fixed Assets

Cash Account Balance = $500,000

Owner/Shareholders invest and receive common stock = $1,000,000

Balance Sheet Cash $0.5 F. Assets 0.5 Common Stock $1 m ___________________________________ T. Assets $1m T. Claims $1m

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The firm purchases $300,000 inventory from suppliers.

Cash Flow Cycle


Buy $300,000 of inventory on trade credit

Step 4

Fixed Assets

Cash Account
Inventory

Balance = $500,000

Owner/Shareholders invest and receive common stock = $1,000,000

Balance Sheet
Cash $0.5 A/P $0.3 Inventory 0.3 F. Assets 0.5 Common Stock $1 m _____________________________________ T. Assets $1.3m T. Claims $1.3m

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Value is added to inventory through labour ($300,000) and equipment ($100,000). Further

Cash Flow Cycle


Work-in-process plus finished goods
Work-in-process inventory
Depreciation

Step 5

Finished goods inventory

Fixed Assets

Labour/utilities

Cash Account
Inventory

Balance = $500,000

Owner/Shareholders invest and receive common stock = $1,000,000

Balance Sheet Cash $0.5 A/P $0.3 Inventory 0.7 Accruals 0.3 F. Assets 0.4 Common Stock $1 m _____________________________________ T. Assets $1.6m T. Claims $1.6m

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Suppliers of initial inventory are paid ($0.3m). Labour costs ($0.2m in accruals) are paid resulting in a $0 cash balance.

Cash Flow Cycle


Payment of initial A/P and Accruals
Finished goods inventory
Depreciation

Step 6

Work-in-process inventory

Fixed Assets

Labour/utilities

$200,000 paid Cash Account


Inventory

Balance = $0

$300,000 paid

Owner/Shareholders invest and receive common stock = $1,000,000

Balance Sheet
Cash $0.0 A/P $0.0 Inventory 0.7 Accruals 0.1 F. Assets 0.4 Common Stock $1 m _____________________________________ T. Assets $1.0m T. Claims $1.1m

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Sale of inventory occurs. Accounts receivable created. Cash = $0. There are 30 days till A/R collected.

Cash Flow Cycle


Goods sold on A/R for a profit
Finished goods inventory
Depreciation

Step 7

Work-in-process inventory

Sold $400,000 of F.G. Inventory for $500,000

Fixed Assets

Labour/utilities

Cash Account
Inventory

Balance = $0

Owner/Shareholders invest and receive common stock = $1,000,000

Balance Sheet Cash A/R Inventory F. Assets $0.0 0.5 0.3 0.4 A/P $0.0

Accruals 0.1 Common Stock $1 m R/E 0.1 ____________________________________ T. Assets $1.2m T. Claims $1.2m

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Summary of the Exercise


This firm is left at the stage where it is waiting to collect on accounts receivable, but should be ordering more inventory and converting that inventory into saleable products. The firm could move forward if it had additional financing:
Sale of additional shares to investors Borrow funds Delay payment of wages to employees until collection of accounts receivable Collect on accounts receivable.
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The Cash Budget


Working Capital Management - General Issues

The Cash Budget


Sample
Table 23-3 ABC's 12-Month Cash Budget $
Sales Cash inflow Cash outflow Current sales Inventory Operating cash Start cash End cash Required cash Surplus/deficit 750 0 250 1,000 1,250 200 1,050 1,125 375 -500 1,250 750 300 450 1,500 375 -375 750 375 400 -25 1,875 375 -250 375 125 500 -375 2,250 375 -125 125 0 600 -600 2,625 375 0 0 0 700 -700 3,000 375 0 0 0 700 -700 3,375 375 250 125 375 900 -525 3,750 375 375 375 750 1,000 -250 4,125 375 500 750 1,250 1,100 150 4,500 375 625 1,250 1,875 1,200 675 4,875 375 750 1,875 2,625 1,300 1,325

1
1,000 1,000

2
1,500 1,000

3
2,000 1,500

4
2,500 2,000

5
3,000 2,500

6
3,500 3,000

7
4,000 3,500

8
4,500 4,000

9
5,000 4,500

10
5,500 5,000

11
6,000 5,500

12
6,500 6,000

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The Cash Budget


Purpose

The cash budget is a planning tool used to forecast cash inflows and outflows (usually each month) out into the future. The purpose of the cash budget is to forecast the timing, magnitude and duration of cash flow surpluses and deficits. The cumulative impact of the cash inflows/outflows will be forecast through the cash budget.

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Forecast Cash Balances


Timing
Predicting when forecast deficits start and end allow the manager to communicate with the bank and eventually becomes a control-mechanism for the bank when monitoring the evolving financial condition of the firm.

$ Cash

Jan Feb Mar Apr May Jun Jul Aug

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Forecast Cash Balances


Magnitude

$ Cash

How much the firm is likely to need to borrow to cover a projected deficit.

Jan Feb Mar Apr May Jun Jul Aug

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Forecast Cash Balances


Duration

$ Cash

The length of time that the projected cash deficit will last is useful in choosing the right financing solution, but is also an important control mechanism for monitoring after the fact.

Jan Feb Mar Apr May Jun Jul Aug

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The Cash Budget


Use

The Cash Budget:


Allows management to change plans before they are implemented to produce a more favourable cash result Allows management to choose the most correct investment option in the case of forecast surpluses Allows management to arrange the most appropriate financing solution in the case of forecast deficits.

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Cash Budgets
Dealing with Forecast Surpluses Knowing the timing, magnitude and duration of cash surpluses allows management to choose the most appropriate management response:
Small Amount of Surplus available for a short period of time (ie. less than $100,000)
Keep in current account

Small Sum available for a long period time


Consider dispersing as cash dividends Potentially retire debt

Large Sum available for a short period of time 30 90 days (ie. greater than $100,00)
Invest in money market securities such as T-bills

Large Sum available for a long period time


Consider dispersing excess funds as cash dividends Alternatively invest in longer-time, higher yielding investments
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Cash Budgets
Dealing with Forecast Deficits Knowing the timing, magnitude and duration of cash deficits allows management to choose the most appropriate management response:
Small deficit persisting for a short period of time (ie. less than $100,000)
Delay purchases, speed collections and try to synchronize cash flows to eliminate or minimize, or Negotiate an operating line of credit with the financial institution

Small deficit available for a long period time


Explore more permanent solutions to the under-funding

Large deficit forecast to last a short period of time 30 90 days (ie. greater than $100,00)
Operating line of credit, or Seek longer term permanent capital solutions if large cash flow deficits are likely to reoccur.

Large Sum available for a long period time


Seek permanent capital increases in the form of debt, equity or combination.

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Analyzing Cash Inflows and Outflows


Cash Changes and Sales Growth Analysis of the impact of sales growth on the firms cash position can be done using Equation 23 -1:
The sensitivity of cash to sales growth will be strongly related to the firms inventory and accounts receivable policies.

[ 23-1]

Cash St 1[1-b(1 2 g )]

Where:
g = monthly sales growth b = the cash production cost and (1 b ) = unit contribution margin, and St-1 = Sales at time minus 1

When this relationship is graphed we get a straight line.


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Analyzing Cash Inflows and Outflows


Credit, Inventory and Payables

We can create a formula to explore the sensitivity of the firms cash position with respect to the firms credit, inventory and payables policies. Let:
= the firms credit policy as the percentage of sales collected this month 1 = the balance of sales collected in the month following sales = the proportion of this months production costs paid in this month 1 - = the proportion of production costs paid next month. = perecentage of the firms monthly sales tied up in inventory
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Analyzing Cash Inflows and Outflows


Credit, Inventory and Payables Equation 23 -2 shows that the change in cash each month depends on:
Credit policy how much sales revenue is collected in the month of sale Inventory management practices Trade credit how much of current production is paid this month versus next month:

[ 23-2]

Cash S1 (1 ) St 1-bbt b(1 ) St 1 b( St St 1 )

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Analyzing Cash Inflows and Outflows


Credit, Inventory and Payables We can simplify Equation 23 -2 by including the sales growth rate and removing the different sales levels:

[ 23-3]

Cash ( 1-b) [-b( )]g St 1

We can now graph the change in cash against the sales growth rate:

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Analyzing Cash Inflows and Outflows


Change in Cash and Sales Growth
23 - 1 FIGURE
The slope of this line is determined by the firms credit, inventory and payables policies and practices.

Cash Sb-1

(1-b)

( b( ))g

g
Break-even Sales Growth Rate

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Analyzing Cash Inflows and Outflows


Change in Cash and Sales Growth
23 - 1 FIGURE
A lower slope for this line will reduce the firms cash sensitivity to changes in sales.

Cash Sb-1

(1-b)

( b( ))g

g
Break-even Sales Growth Rate

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Analyzing Cash Inflows and Outflows


Change in Cash and Sales Growth
23 - 1 FIGURE
A lower slope can be achieved by: Collecting on A/R more quickly Delaying payments on A/P longer Increasing the inventory turnover rate.

Cash Sb-1

(1-b)

( b( ))g

g
Break-even Sales Growth Rate

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Analyzing Cash Inflows and Outflows


Credit, Inventory and Payables
We can solve for the monthly sales growth rate where the firm can grow without needing or generating cash:

[ 23-4]

1 b g [b( ) ]

The firm can grow faster if:


It has a higher gross margin (1 b) Lower production costs (b) Collects is receivables more quickly (higher ) Pays its bills more slowly (lower ) Has less inventory (lower )
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Useful Ratios in Working Capital Management


Working Capital Management - General Issues

Use of Ratios in Working Capital Management


Ratios are commonly used to assess or to summarize a firms working capital management. The focus of such an assessment is:
Liquidity management The firms efficiency in asset utilization Current liability management

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Working Capital Management


Liquidity Ratios
Ratios used to assess the firms liquidity include the current and quick ratios:
Current ratio Current assets (CA) Current liabilities (CL)

[ 23-5]

[ 23-6]

Quick ratio

Cash(C ) Marketablesec urities( MS) accounts receivable( AR) CL

Excessive liquidity will reduce ROI and ROE. It can also mean the firm is too lenient in terms of credit policy, or may have excessive inventories that may be subject to technological obsolescence.
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Working Capital Management


Working Capital Ratios Changes in these ratios can indicate growing problems with credit policy and/or a need to improve collections efforts.
Sales AR

Receivables turnover(R T)
[ 23-7]

[ 23-8]

Average collection period(ACP)

AR 365 Average daily sales( ADS) RT

The shorter the collection period, the lower the cash sensitivity to changes in sales.
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Working Capital Management


Working Capital Ratios
CGS is not likely to be comparable across different firms, so alternative is to use Sales in the numerator as illustrated in Equation 23 - 10.
Costof goods sold (CGS ) Inventory

[ 23-9]

InventoryTurnover(I T)

[ 23-10]

InventoryTurnover(I T)

Sales Inventory

The higher the inventory turnover, the lower the sensitivity of cash to changes in sales.

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Working Capital Management


Working Capital Ratios Dividing 364 days by inventory turnover (IT) gives ADSI:
Sales Inventory

[ 23-10]

InventoryTurnover(I T)

[ 23-11]

Average days sales in inventory(ADSI)

Inventory 365 ADS IT

The higher IT the lower ADSI showing more efficient inventory management and a reduced sensitivity of cash to changes in sales.
CHAPTER 23 Working Capital Management General Issues 23 - 49

Working Capital Management


Working Capital Ratios
On the liability side of the balance payable management ratios include:

[ 23-12]

Payables turnover( PT)

Sales Accounts payable

[ 23-13]

Average days of sales in payables(ADSP)

Accounts payable 365 ADS PT

PT shows how many times a year a firm pays off its suppliers on average. ADSP shows how long a firm defers payments to its suppliers.
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Operating and Cash Conversion Cycles


Working Capital Management: General Issues

Operating Cycle (OC)


Operating cycle is the time period between the acquisition of inventory and when cash is collected from receivables.

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Working Capital Management


Operating and Cash Conversion Cycles Operating Cycle is defined by Equation 23 -14:

[ 23-14]

OC ADSI ACP

Operating cycle is a function of average days sales in inventory and the average collection period.

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Cash Conversion Cycle (CCC)


Cash cycle is the time between cash disbursement and cash collection. An estimate of the average time between when a firm pays cash for its inventory purchases and when it receives cash for its sales; the average number of days of sales that firm must finance outside the use of trade credt.
CHAPTER 23 Working Capital Management General Issues 23 - 54

Working Capital Management


Operating and Cash Conversion Cycles The Cash Conversion Cycle is defined by Equation 23 15:

[ 23-15]

CCC OC - ADSP

The estimated time between when a firm pays cash for inventory purchases and when it receives cash from sales.

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Cash Conversion Cycle (CCC)


Operating and Cash Conversion Cycles

Cash Conversion Cycle

= Inventory conversion period + Receivables conversion period Payables deferral period

Management of the cash cycle can make an important difference in the amount of financing required, assets employed to generate a given level of sales...and therefore, can affect ROA and ROE.

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Cash Flow Time Line


Operating and Cash Conversion Cycles

Inventory sold Inventory purchased Inventory period Accounts payable period Cash paid for inventory Accounts receivable period

Cash received

Time

Operating cycle (OC) Cash Conversion Cycle (CCC)

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Summary and Conclusions


In this chapter you have learned:
The importance of effective working capital management and the classic cash flow challenges faced by growing firms. That an integrative approach to working capital management reveals the relationships and interdependency among working capital accounts How to generate and use cash budgets How to use some common ratios to assess a firms overall approach to working capital management.

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Concept Review Questions


Working Capital Management: General Issues

Concept Review Question 1


Profit and Cash Flow from Operations

What is the difference between profit and cash flow from operations?

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Internet Links

Treasury Management Association of Canada Canadian Tire Air Canada Dominion Bond Rating Service Standard and Poors

Web Links CHAPTER 23 Working Capital Management General Issues 23 - 61

Copyright
Copyright 2007 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (the Canadian copyright licensing agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these files or programs or from the use of the information contained herein.

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Importance of Cash Flow


Planning to have cash available to pay bills of the business as they become due is a critical aspect of business survivalit is a management skill. Understanding the cash flow cycle of a firm can help you manage those elements that are critical to ensuring you can pay your bills. Cash flow forecasting through a cash budget provides important information to you and to your potential funding partners about your operating financial needs and most particularly, the timing and magnitude of any projected cash deficits or surpluses.

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The Cash Budget


The purpose of the cash budget is to forecast the timing and magnitude of expected cash deficits and surpluses so that, before the fact, you (the manager) can arrange appropriate financing or plan an appropriate investment strategy.

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Short-term Borrowing

Short-term Credit
short-term loans can be secured much more quickly than long-term credit short-term credit is generally more flexible
low flotation costs generally no prepayment penalties fewer restrictive covenants

with an upward sloping yield curve - short-term credit is normally less expensive than long-term debt short-term credit may be more risky than long-term debt:
interest rate risk exposure renegotiation risk

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Sources of Short-term Financing


Accruals
spontaneous source of financing no explicit cost to these sources examples:
accrued wages accrued taxes

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Sources of Short-term Financing


Accounts Payable / Trade Credit
there may be no explicit cost (eg. Net 30) if there is a discount for early payment, then there is an implicit cost for not taking the discount. discounts lost - an expense on the income statement can reduce net income more than taking a loan in order to take the discount.

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Approximate Cost of A/P


Approximate percentage cost = [Discount percentage/(100 - Discount percentage)] [365/(Days credit is outstanding - Discount period)] EAR = (1 + periodic interest rate)(number of times/year such an activity can occur) - 1 Example: assume (2/10 net 30) Approximate percentage cost = (2/98)(365/20) = 37.2% EAR = (1 + .0204082)18.25 - 1 = 1.4458539 - 1 = 44.6% (This, of course, assumes that the company pays on the 30th day. The costs will change if the firm pays later or earlier.)

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Sources of Short-term Financing


Bank Loans
types:
operating loans line of credit revolving credit agreement

costs:
Effective ratesimple = interest/amount received = $800/$10,000 = 8%

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Costs of Bank Loans


Discount Interest
Interest is deducted in advance, reducing the principal amount available to to borrower.

Effective ratediscount = interest/amount received = interest/(Face value - interest) = $800/($10,000 - $800) = 8.7% or Effective ratediscount = 8%/(1-.08) = 8%/(.92) = 8.7%

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Cost of Bank Loans


Compensating Balances
Reduce the the amount of the loan available to the borrower and effectively increase the cost of the loan.
Effective ratesimple/CB = Nominal Rate(%)/ (1.0 - CB stated as a fraction) = 8%/(1.0 - 0.10) = 8%/.9 = 8.9%

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Commercial Paper
short-term unsecured promissory note issued only by the most credit-worthy of corporate issuers by-passes banks and allows the firm direct access to the money market is a negotiable security that does not carry a stated rate of interest, rather, it trades at a discount from par value.

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Bankers Acceptances
an alternative to commercial paper for smaller firms that dont have the credit-worthiness to secure commercial paper financing. a money market instrument the bank accepts the promissory note by stamping it accepted....the note therefore is secured by the Banks promise to pay.

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Pledging of A/R
lender has claims against the receivables as well as recourse to the borrower. the risk of default on the receivable stays with the borrower. the buyer of the goods does not know that the receivables have been pledged as collateral for a loan.

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Factoring (Selling) A/R


legally binding agreement between the seller of the goods and the financial institution. the factoring institution receives a credit approval slip...the institution does a credit check...if approved, shipment is made and the buyer is instructed to make payment directly to the factoring company. the factor - credit check - lends - bears risk - in the process of performing these functions, the firm that sells its receivables to a factor, eliminates the need for an accounts receivable department and receives a net amount of cash immediately following the sale...these funds are advanced by the factor. the factor is compensated for its services and protects its interests by charging interest, charging a commission and maintaining a hold-back(reserve) in the case of disputes between buyer and seller over damaged goods, returns, etc. once this arrangement is in place - the financing is spontaneous.

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Inventory Financing
Blanket Liens - gives the lending institution a lien against all of the borrowers inventories. Trust Receipts - issued for specific items of inventory. The lending institution sends someone to the borrowers premises to periodically check that the numbers are correctly listed. Warehouse Receipts - either an independent third party warehouses the goods, or the goods are secured in a separate location on the borrowers property. Warehouse financing involves:
physical control of the inventory supervision by a custodian
- used to finance the seasonal buildup of inventory. - ensures proper warehousing practices...and inventory control. - because of the foregoing, inventory becomes more acceptable as collateral.

public notification

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Financial Statement Analysis Using Ratios

Balance Sheet Accounts over time

120 100 80 60 40 20 0 Ja Fe Ma Ap Ma Jn Ju Au Se Oc No De
CHAPTER 23 Working Capital Management General Issues 23 - 79

Cash Inventories

Selecting the Fiscal Year End


tax considerations
for smaller, owner/managed enterprises, there are greater tax-planning opportunities if the corporate fiscal year end is set sometime after the calendar year end

the firms financial position firms will look most healthy if the fiscal year end is set sometime after the seasonal sales peak....long enough afterward to see receivables collected. auditors preferences auditors are busy around the calendar year end...with firms and individuals that have selected Dec 31 as their year end. auditors are busy from February through May with income tax

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Cash and Marketable Securities Management


Business 2039

Key Topics
Reasons for holding Cash Advantages of holding Cash Cash Budgets Cash Management Techniques Marketable Securities Management Criteria for selecting marketable securities Balancing Cash and Marketable Security Holdings

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Reasons for Holding Cash


transactions compensation to banks for providing services and loans precautionary balances/speculative balances vs. reserve borrowing capacity.

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Advantages of Holding Cash


take advantage of trade discounts maintain adequate liquidity...and therefore a strong credit rating take advantage of special offers and unexpected opportunities have sufficient liquid resources in times of emergency

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Marketable Securities
holding M/S
conservative working capital management strategy finance seasonal/cyclical needs build funds for a major investment/acquisition/cash outflow productive precautionary balance

criteria used to select M/S


default risk interest rate risk purchasing power risk liquidity or marketability risk overall rate of return

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In summary you have


gained an understanding the management of short-term finance learned that short-term cash flow management involves the minimizing of costs while ensuring there are adequate liquid resources available to meet the anticpated needs learned that in the real world, the firm must keep additional working capital resources as a buffer against unexpected needs and opportunities learned how to prepare a cash budget and how to use it.

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