Man Fin Test #2 Chapter 6-8

Cost-benefit Analysis

A cost-benefit analysis is a process businesses use to analyze decisions. The business or analyst sums the benefits of a situation or action and then subtracts the costs associated with taking that action. Some consultants or analysts also build the model to put a dollar value on intangible items, such as the benefits and costs associated with living in a certain town, and most analysts will also factor opportunity cost into such equations.

How to reduce the cash conversion cycle

CCC=ICP+DSO-DPO Decrease Inventory Conversion Period (ICP): the amount of days it takes to sell an entire inventory Decrease Days Sales Outstanding (DSO): the amount of days needed to collect on sales or accounts receivable Increase Days Payable Outstanding (DPO): refers to the company's payment of its own bills. or accounts payable

Collections and Disbursement methods

Critical function of financial manager is managing cash inflows and payment outflow -Electronic transfer mediums change time period between payment and collection Cash flow cycle still affected by collection mechanisms -Lockboxes -US mail systems -International sales, etc. -Synchronizing Cash Flows

understand float

Difference between firm's recorded amount and amount credited to firm by bank Two types of float -Mail float --Occurs because of time mail takes to be delivered -Clearing float --Occurs because of time check takes to be cleared -Small businesses and individuals encounter this most often

Effective rate comparisons

Effective interest rate is based on: -Loan amount -Dollar interest paid -Length of loan -Method of payment -Effective rate = (Interest/Principle)x(Days in a year/Days loan is outstanding)

understand marketable securities

Marketable securities are liquid financial instruments that can be quickly converted into cash at a reasonable price. The liquidity of marketable securities comes from the fact that the maturities tend to be less than one year, and that the rates at which they can be bought or sold have little effect on prices. Types of short-term investments -Treasury bills -Federal agency securities -Certificates of deposit -Commercial paper -Banker's acceptance -Eurodollar certificates of deposit -Passbook savings account -Money market funds -Money market accounts

Alternative Current Asset Financing Policies - How Financed?

Maturity matching ("self-liquidating") approach -Match asset and liability maturities Aggressive approach -Finance all temporary assets with short-term, spontaneous debt, and finance all fixed assets and some permanent assets with long-term, non-spontaneous funds Conservative approach -Use permanent capital to finance all permanent assets and some seasonal, temporary needs; use spontaneous, short-term debt to finance the rest of the seasonal needs

Alternative Current Asset Investment Policies - How Much?

Relaxed Current Asset Investment Policy -Relatively large amounts of cash and marketable securities and inventories are carried and sales are stimulated by a liberal credit policy that results in a high level of receivables Restricted Current Asset Investment Policy -Holdings of cash and marketable securities and inventories are minimized Moderate Current Asset Investment Policy -A policy that is between relaxed and restricted policies

Cash Conversion Cycle (CCC)

The cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables, and the length of time the company is afforded to pay its bills without incurring penalties.

Reasons for cash

Transactions balances -Payments towards planned expenses Compensating balances for banks -Compensate bank for services provided rather than paying directly for them Precautionary needs -Emergency purposes when cash inflows are less than projected -Important in seasonal and cyclical industries Speculative balance -Cash balance held to enable the firm to take advantage of any bargain purchases that might arise

What are the two questions we need to answer with regard to working capital?

What is the appropriate level for current assets, both in total and by specific accounts? How should current assets be financed?

Why is working capital important?

Working capital is a measure of both a company's operational efficiency and its short-term financial health. The working capital ratio (current assets/current liabilities), or current ratio, indicates whether a company has enough short-term assets to cover its short-term debt. A good working capital is between 1.2 and 2.0.

What is working capital?

Working capital is the difference between a company's current assets, like cash, accounts receivable and its current liabilities, like accounts payable. Working Capital= Current Assets - Current Liabilities

Working capitals impact on ROI

Working capital represents the difference between a firm's current assets and current liabilities. Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges. Negative cash flow can occur if operating activities don't generate enough cash to stay liquid. This can happen if profits are tied up in accounts receivable and inventory, or if a company spends too much on capital expenditures.