Working Capital Management
Cash Turnover
365/CCC
A/R Manager
Credit Manager responsibility Billing Remittance Monitor Payment Patterns Collect Delinquient
Trade Credit Policies
Credit Standards Credit Terms-2/10/net 30 Discount Terms Collection Policies
current assets
assets that are expected to be converted into cash within one year ex: cash, marketable securities, A/R, inventory and prepaid expenses
Ways to Obtain (increase Working Capital)
collecting cash flow from operations increasing debt selling assets and investments selling equity
Aggressive Financing Strategy
company finances all fixed assets with long
Trade Credit Standards
company must establish credit acceptance criteria that represent a maximum amount of payment risk the company is willing to assume must decide whether to approve a credit applicant under the criteria and set a credit limit for each applicant
Working Capital
current assets less current liabilities, which roughly correspond to cash and liquid assets that can quickly be converted to cash
Current Ratio
current assets/current liabilities a high value suggest a strong liquidity position
Invoicing Float
delay between the day that a customer places an order and the day that the customer actually receives an invoice for that order that can be precessed for payment.
Cash Inflows
include funds collected from customers, obtained from financial sources, and/or received from other sources. This is typically referred to as the order-to-cash timeline
Cash Outflows
include funds disbursed to employees, vendors, and suppliers, lenders, local, state and federal tax agencies, bondholders and shareholders. This process is referred to as the purchase-to-pay timeline.
Concentration/funding flows
involve internal transfers among operating units of a company and between a firm's various bank accounts, with the objectives of pooling funds for other purposes or funding various disbursement accounts
Liquidity Management flows
involve using the organization's liquidity reserves in the most effective manner. If there is a surplus of funds, treasury may either 1 invest in suitable investments 2 pay down existing debt. If there is a shortage of funds, treasury may 1 sell off investments 2 draw on available debt sources
Current Liabilities
liabilities that are required to be paid for within one year ex: A/P, debt maturing in less than one year, notes payable, and accused liabilities
Working Capital Management
management of business and financial processes aimed at maximizing or creating shareholder value by optimizing the cash locked in short-term assets and liabilities
Payment Float
payee's (seller) perspective-delay b/w the time an invoice is sent to the buyer and the time the payee's account is credited with available funds. payor's (buyer) perspective-delay b/w the time an invoice is received and the time the buy/payor's account is debited
Information Float
refers to lack of knowledge about the funds themselves. time between receiving good funds and the time the organization knows that it has the funds available and can actually make use of those funds.
Clearing Float
time interval or delay b/w the day when a check is deposited by the payee and the day when the payor's account is debited
Ways to Use (decrease) Working Capital
using cash flow in operations repaying debt purchasing assets and investments paying dividends and buying back stock/equity
5 C's of Credit
Character Capacity Capital Collateral Conditions
Cash Conversion Cycle (CCC)
Days' Inventory+ Days' Receivables-Days' Payables method for calculating the average length of time a company must finance a cash outflow before receiving a cash inflow
Assets
Liabilities+Equity
Conservative Financing Strategy
Long-term financing supports fixed assets, permanent current assets, and some portion of fluctuating current assets. Higher financing costs than other approaches b/c long term debt is carried when it is not needed.
Credit Manager
Treasury separate but must maintain relationship Credit is a sales tool Credit Standards Credit Extension terms and approvals Set individual/aggregate credit limits
Disbursement Float
time interval or delay b/w the day when a payment is initiated and the day when funds are debited from the payor's account. Subject to Mail, Processing, and Availability Float and analogous to collection float except that it is viewed from the payor's perspective. Primary difference b/w collection and disbursement float is availability versus clearing float
Collection Float
time interval or delay b/w the time the buyer/payor initiates payment and the time the seller/payee receives good funds. Collection Float applies principally to paper-based payment instruments that are subject to 3 types of float: Mail Float-time interval b/w the day a payment is mailed and the day it is received by a payee or at a payee's processing site. Processing Float-time interval b/w the time the payee receives the payment and the time the payment is deposited into the payee's account Availability Float-time interval b/w the day when a payment is deposited into a bank account and the day when the payee's account is credited with collected funds
Maturity-Matching Financing Strategy
total of permanent current assets and fixed assets are financed with long-term financing. Short-term financing is used to finance fluctuating current assets.