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.