Beruflich Dokumente
Kultur Dokumente
Introduction
O Cash The currency and coin the firm has on
hand in petty cash drawers, in cash registers or in checking accounts at various commercial banks
O Cash is the most liquid asset and often called as
non earning asset due to its holdings give no return but are needed to meet its maturing obligations. Without cash the firm cannot operate. Thus its crucial to hold min amount of cash sufficiently to support firms normal business activities.
balances to meet obligations or payments arise in the ordinary course of doing business. E.G. purchase materials, pay bills
O Precautionary motive act as a buffer to meet
unforeseen events, which require immediate cash payment. This may arise due to risk and uncertainty. (taking advantage of investment opportunity)
Cont.
O Speculative Motive to hold sufficient
liquid assets to enable the firm to take advantage of any unexpected bargain purchase that may arise anytime
FI for providing loans and services. Required firms to maintain min level of money in its banks a/c. (normally based on certain % of the loans taken)
Cash Management
O GOAL - To minimize cash balance while maintaining
Cash flow mgt speed up collections , slow down disbursements and maintain good banking relationship to ease all transactions. - Prepare cash budget in order to determine the optimal cash balance - Develop borrowing or investment strategies (use idle temporary liquidity and earn return concept)
various alternatives and repay its debts when they are due. O Cash balances and safety stock of cash are influenced by firms production, sales techniques, procedure for collecting sales receipt and payment for purchases or known as Operating Cycle (OC) and Cash Cycle (CC).
Operating Cycle
O The length of time between the purchase of raw material
*AAI (Average Age of Inventory) The average length of time goods is in inventory *ACP (Average Collection Period) the average number of days customers take to pay
Cash Cycle
O Cash Cycle (CC) O The lag time between cash outlay to purchase raw
materials or inventories and cash is collected from receivables (overall period between the time cash is paid out to suppliers & cash is received from customers).
= [AAI + ACP] APP APP (Average Payment Period) The average numbers of days the firm take to pay for the purchase of raw materials
Valuation
O Cash Turnover (CTO) O Measure how effective cash is managed in the firm O The number of times the firms cash is actually turned
Valuation
O Minimum Operating Cash (MOC) O Amount of cash that need to be held at any
given time to support operations O Lower MOC requirements will lower investment in cash to support firms operations
O MOC = Annual cash outlays / Cash Turnover
QUESTION
Cik Shasha is planning to determine the firms minimum operating cash to reduce the firms cost of investment. Currently the firm is holding RM110,000 cash on average continuously. The firm is selling on terms net 45. All customers normally pay on the last day. The firm pays all credit purchases on net 30. The firm takes 40 days to produce and 20 days to sell the products. The firms yearly cash outlay is RM500,000. (Use 360 days in a year)
QUESTION
a) Calculate the cash cycle, cash turnover and the minimum operating cash. b) Is the current cash holding sufficient to meet its need ? Why?
a)
CC
= AAI + ACP APP = 60 + 45 30 = 75 DAYS CTO = 360 / 75 = 4.8x = 500 000 / 4.8 = RM104,166.67
MOC
b) Yes, its sufficient since cash holding > Minimum Operating Cash (MOC)
relatively short time for its conversion to cash without losing the face value. O 2 reasons for holding MS: O a) Substitute for cash precautionary purposes as a cushion against unexpected shortage of bank credit (eg. OD) or other emergency cash outflows
Cont.
O b) Temporary investment firms
cash receipts rarely match its disbursement thus, to finance seasonal needs for cash and to meet known future financial requirements
O MS portfolio differs in terms of:
Cont.
O Default risk the risk that an issuer will be unable
these securities, but the company must be brave enough to face a higher risk.
Marketable securities
O Def : security investments that the firm can quickly
receipts for funds that have been deposited in a bank for a fixed period
specific bank by an exporter in order to obtain payment for goods shipped to a customer, who maintains an account with specific bank.
mature in 91-182 days with longer maturity such as 9 months or 1 year. In denomination of RM1,000.
O Treasury notes US Treasury obligation with