9 working capital management compatibility mode

27 3 0
  • Loading ...
1/27 trang

Thông tin tài liệu

Ngày đăng: 17/09/2020, 14:00

Topic Working capital management Introduction to Financial Management course By Dr Nguyen Thu Hien Modified from slides by Ross, Westerfield, Jordan, “Fundamentals of Corporate Finance”, 7th ed., McGraw-Hill Irwin Key Concepts and Skills Understand the components of the cash cycle and why it is important Understand the pros and cons of the various short-term financing policies Be able to prepare a cash budget Understand the various options for short-term financing Sources and Uses of Cash Review Balance sheet: CA + FA = CL + Long-term Debt + Equity NWC + FA = LTD + E NWC = Cash + Other CA – CL Cash = LTD + E + CL – Other CA – FA Sources Increasing long-term debt, equity or current liabilities Decreasing current assets other than cash or fixed assets Uses Decreasing long-term debt, equity or current liabilities Increasing current assets other than cash or fixed assets The Operating Cycle Operating cycle – time between purchasing the inventory and collecting the cash from selling the inventory Inventory period – time required to purchase and sell the inventory Accounts receivable period – time required to collect on credit sales Operating cycle = inventory period + accounts receivable period Figure 19.1 Cash Cycle Cash cycle Amount of time we finance our inventory Time from receiving cash from the sale and paying for the inventory Accounts payable period – time between purchase of inventory and payment for the inventory Cash cycle = Operating cycle – accounts payable period Example – Operating Cycle Inventory: Beginning = 200,000 Ending = 300,000 Accounts Receivable: Beginning = 160,000 Ending = 200,000 Accounts Payable: Beginning = 75,000 Ending = 100,000 Net sales = 1,150,000 Cost of Goods sold = 820,000 Example – Operating Cycle Inventory period Average inventory = (200,000+300,000)/2 = 250,000 Inventory turnover = 820,000 / 250,000 = 3.28 times Inventory period = 365 / 3.28 = 112 days Receivables period Average receivables = (160,000+200,000)/2 = 180,000 Receivables turnover = 1,150,000 / 180,000 = 6.39 times Receivables period = 365 / 6.39 = 58 days Operating cycle = 112 + 58 = 170 days Example – Cash Cycle Payables Period Average payables = (75,000+100,000)/2 = 87,500 Payables turnover = 820,000 / 87,500 = 9.37 times Payables period = 365 / 9.37 = 39 days Cash Cycle = 170 – 39 = 131 days We have to finance our inventory for 131 days If we want to reduce our financing needs, we need to look carefully at our receivables and inventory periods – they both seem extensive Working capital management Short-Term Borrowing Unsecured Loans Line of credit Committed vs noncommitted Revolving credit arrangement Letter of credit Compensating balance Secured Loans Accounts receivable financing Assigning Factoring Inventory loans Blanket inventory lien Trust receipt Field warehouse financing Commercial Paper Trade Credit 12 Example: Compensating Balance We have a $500,000 line of credit with a 15% compensating balance requirement The quoted interest rate is 9% We need to borrow $150,000 for inventory for one year How much we need to borrow? 150,000/(1-.15) = 176,471 What interest rate are we effectively paying? Interest paid = 176,471(.09) = 15,882 Effective rate = 15,882/150,000 = 1059 or 10.59% 13 Example: Factoring Last year your company had average accounts receivable of $2 million Credit sales were $24 million You factor receivables by discounting them 2% What is the effective rate of interest? Receivables turnover = 24/2 = 12 times APR = 12(.02/.98) = 2449 or 24.49% EAR = (1+.02/.98)12 – = 2743 or 27.43% 14 Quick summary How you compute the operating cycle and the cash cycle? What are the major forms of short-term borrowing? 15 Short-term lending Credit policy and Receivables Terms of the Sale Credit Analysis 16 Credit Management: Key Issues Granting credit increases sales Costs of granting credit Chance that customers won’t pay Financing receivables Credit management examines the trade-off between increased sales and the costs of granting credit 17 Components of Credit Policy Terms of sale Credit period Cash discount and discount period Type of credit instrument Credit analysis – distinguishing between “good” customers that will pay and “bad” customers that will default Collection policy – effort expended on collecting receivables 18 The Cash Flows from Granting Credit Credit Sale Check Mailed Check Deposited Cash Available Cash Collection Accounts Receivable 19 Terms of Sale Basic Form: 2/10 net 45 2% discount if paid in 10 days Total amount due in 45 days if discount not taken Buy $500 worth of merchandise with the credit terms given above Pay $500(1 - 02) = $490 if you pay in 10 days Pay $500 if you pay in 45 days 20 Example: Cash Discounts Finding the implied interest rate when customers not take the discount Credit terms of 2/10 net 45 Period rate = / 98 = 2.0408% Period = (45 – 10) = 35 days 365 / 35 = 10.4286 periods per year EAR = (1.020408)10.4286 – = 23.45% The company benefits when customers choose to forgo discounts 21 Credit Policy Effects Revenue Effects Delay in receiving cash from sales May be able to increase price May increase total sales Cost Effects Cost of the sale is still incurred even though the cash from the sale has not been received Cost of debt – must finance receivables Probability of nonpayment – some percentage of customers will not pay for products purchased Cash discount – some customers will pay early and pay less than the full sales price 22 Credit Analysis Process of deciding which customers receive credit Gathering information Financial statements Credit reports Banks Payment history with the firm Determining Creditworthiness C’s of Credit Credit Scoring 23 Credit Information Financial statements Credit reports with customer’s payment history to other firms Banks Payment history with the company 24 Five Cs of Credit Character – willingness to meet financial obligations Capacity – ability to meet financial obligations out of operating cash flows Capital – financial reserves Collateral – assets pledged as security Conditions – general economic conditions related to customer’s business 25 Quick summary What are the key issues associated with credit management? How would you estimate cost of credit policy? How would you analyze whether to grant credit to a new customer? 26 ... (75,000+100,000)/2 = 87,500 Payables turnover = 820,000 / 87,500 = 9. 37 times Payables period = 365 / 9. 37 = 39 days Cash Cycle = 170 – 39 = 131 days We have to finance our inventory for 131 days If... effective rate of interest? Receivables turnover = 24/2 = 12 times APR = 12(.02/ .98 ) = 24 49 or 24. 49% EAR = (1+.02/ .98 )12 – = 2743 or 27.43% 14 Quick summary How you compute the operating cycle... need to look carefully at our receivables and inventory periods – they both seem extensive Working capital management Carrying vs Shortage Costs Managing short-term assets involves a tradeoff between
- Xem thêm -

Xem thêm: 9 working capital management compatibility mode , 9 working capital management compatibility mode

Gợi ý tài liệu liên quan cho bạn