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Cash outflows/disbursements
1. Payments of accounts payable. These are payments for goods or services rendered by suppliers, such as raw materials. Generally, these payments will be made sometime after purchases. 2. Wages, taxes, and other expenses. This category includes all other regular costs of doing business that require actual expenditures. Depreciation, for example, is often thought of as a regular cost of business, but it requires no cash outflow and is not included. 3. Capital expenditures. These are payments of cash for long-lived assets. 4. Long-term financing expenses. This category, for example, includes interest payments on long-term debt outstanding and dividend payments to shareholders.
2 kinds of shortage costs
1. Trading, or order, costs. Order costs are the costs of placing an order for more cash (brokerage costs, for example) or more inventory (production setup costs, for example). 2. Costs related to lack of safety reserves. These are costs of lost sales, lost customer goodwill, and disruption of production schedules.
trust receipt
A ___is a device by which the borrower holds specific inventory in "trust" for the lender. Automobile dealer financing, for example, is done by use of trust receipts. This type of secured financing is also called floor planning, in reference to inventory on the showroom floor. However, it is somewhat cumbersome to use trust receipts for, say, wheat grain.
the shorter the cash cycle, the lower the firm's investment in..
-Accounts Receivables -Inventories
Shortage costs
Costs that fall with increases in the level of investment in current assets. .
Receivables turnover
Credit sales/Avg accounts receivable
Accounts payable period
The time between receipt of inventory and payment for it.
inventory loans
short-term loans to purchase inventory, come in three basic forms: blanket inventory liens, trust receipts, and field warehouse financing
Activities that increase cash are called
sources of cash.
Short term finance is primarily concerned with ...
the analysis of decisions that affect current assets and current liabilities.
Restrictive short-term financial policies (The Size of the Firm's Investment in Current Assets)
1. Keeping low cash balances and little investment in marketable securities. 2. Making small investments in inventory. 3. Allowing few or no credit sales, thereby minimizing accounts receivable.
Receivables period
365/ Receivables turnover EX. Answer was 57. The receivables period is also called the days' sales in receivables or the average collection period. Whatever it is called, it tells us that our customers took an average of 57 days to pay.
Net working capital
=(Cash + Other current assets) - Current liabilities
line of credit
A formal (committed) or informal (noncommitted) prearranged, short-term bank loan.
Current liabilities are obligations that are expected to require cash payment within one year. Three major items found as current liabilities are .....
ACCOUNTS PAYABLE; EXPENSES PAYABLE, INCLUDING ACCRUED WAGES AND TAXES; AND NOTES PAYABLE.
Current assets are presented on the balance sheet in order of their liquidity—the ease with which they can be converted to cash and the time it takes to convert them. Four of the most important items found in the current asset section of a balance sheet are ...
CASH AND CASH EQUIVALENTS, MARKETABLE SECURITIES, ACCOUNTS RECEIVABLE, AND INVENTORIES.
Inventory turnover
COGS/Avg Inventory Ex. Answer was 3.28. Loosely speaking, this tells us that we bought and sold off our inventory 3.28 times during the year.
Carrying costs
Costs that rise with increases in the level of investment in current assets. - opportunity costs associated with current assets
Basic balance sheet identity
Net working capital + Fixed assets = Long-term debt + Equity
Accounts receivable period
The time between sale of inventory and collection of the receivable.
Inventory period
The time it takes to acquire and sell inventory.
field warehouse financing
a public warehouse company (an independent company that specializes in inventory management) acts as a control agent to supervise the inventory for the lender.
long-term finance, is primarily concerned with ...
capital budgeting, dividend policy, and financial/capital structure.
Blanket inventory lien.
gives the lender a lien against all the borrower's inventories (the blanket "covers" everything).
Accounts receivables financing
involves either assigning receivables or factoring receivables. Under assignment, the lender has the receivables as security, but the borrower is still responsible if a receivable can't be collected. With conventional factoring, the receivable is discounted and sold to the lender (the factor). Once it is sold, collection is the factor's problem, and the factor assumes the full risk of default on bad accounts. With maturity factoring, the factor forwards the money on an agreed-upon future date.
cash budget
is a primary tool in short-run financial planning. It allows the financial manager to identify short-term financial needs and opportunities. Importantly, the ____ will help the manager explore the need for short-term borrowing.
short-term financial policy
optimal investment in current assets
activities that decrease cash are called
uses of cash -A use of cash involves decreasing a liability by paying it off, perhaps, or increasing assets by purchasing something. Both of these activities require that the firm spend some cash.
Activities That Decrease Cash
-Decreasing long-term debt (paying off a long-term debt). -Decreasing equity (repurchasing some stock). -Decreasing current liabilities (paying off a 90-day loan). -Increasing current assets other than cash (buying some inventory for cash). -Increasing fixed assets (buying some property).
Activities That Increase Cash
-Increasing long-term debt (borrowing over the long term). -Increasing equity (selling some stock). -Increasing current liabilities (getting a 90-day loan). -Decreasing current assets other than cash (selling some inventory for cash). -Decreasing fixed assets (selling some property).
Flexible short-term financial policies with regard to current assets include such actions as: (The Size of the Firm's Investment in Current Asset)
1. Keeping large balances of cash and marketable securities. 2. Making large investments in inventory. 3. Granting liberal credit terms, which results in a high level of accounts receivable. flexible short-term financial policies are costly in that they require a greater investment in cash and marketable securities, inventory, and accounts receivable.
Inventory period formula
365/Inventory turnover EX. Answer was 11.3, so, the inventory period is about 111 days. On average, in other words, inventory sat for about 111 days before it was sold
Payable period
=365/Avg payables EX. Answer was 39. We took an average of 39 days to pay our bills.
Payables turnover
=COGS/Avg payables
net cash inflow
=Cash collections- Cash disbursements
Cash cycle
The time between cash disbursement and cash collection. =Operatng cycle-Accounts payable period The _____ increases as the inventory and receivables periods get longer. A lengthening cycle can indicate that the firm is having trouble moving inventory or collecting on its receivables. It decreases if the company is able to defer payment of payables and thereby lengthen the payables period.
Operating cycle
The time period between the acquisition of inventory and the collection of cash from receivables. =Inventory period + AR period
The short-term financial policy that a firm adopts will be reflected in at least two ways:
1. THE SIZE OF THE FIRM'S INVESTMENT IN CURRENT ASSETS. This is usually measured relative to the firm's level of total operating revenues. A FLEXIBLE, or accommodative, short-term financial policy would maintain a relatively high ratio of current assets to sales. A RESTRICTIVE short-term financial policy would entail a low ratio of current assets to sales. 2. THE FINANCING OF CURRENT ASSETS. This is measured as the proportion of short-term debt (that is, current liabilities) and long-term debt used to finance current assets. A RESTRICTIVE short-term financial policy means a high proportion of short-term debt relative to long-term financing, and a FLEXIBLE policy means less short-term debt and more long-term debt.
