2.3. Internal Financing Flashcards
Selected internal financing | Financing from operating activities
1.
2.
- financing via depreciation
- financing via provisioning
Selected internal Financing | Financing from asset reallocation
1.
2.
3.
- divestment
- working capital management
- sale-and-lease back
Working Capital Management
1.
2.
3.
- reduction in inventory
- reduction of the receivables portfolio
- increase in trade payables
- Any reduction in working capital requirements generates….
- Similarly, when evaluating a project, reducting the projects net workinf capital needs over the projects life….
- …. a positive free cash flow that the firm can distribute immediately to shareholders.
- reduces the opportunity cost associated with this use of capital
Managing wokring capital efficietly will…
…. maximize firm value
Receivables Management | Establishing a credit policy involes three steps…
1.
2.
3.
- establishing credit standards
- establishing credit terms
- establishing a collection policy
What is an aging shedule?
1.
2.
3.
- categorizes accounts by number of days they have been on the firms books
- can be prepared using either the number of accounts or the dollar amount of the accounts receivable outstanding
- if it gets “bottom-heavy”, i.e. the percentages in the lower half of the schedule begin to increase. the firm will likely need to revisit its credit policy
What does it mean if an aging schedule gets bottom heavy?
1.
2.
- means that the precentages in the lower half of the schedule begin to increase
- the firm will likely need to revisit its credit policy
Payables Management | Why is it important?
1.
2.
- a firm should monitor its accounts payable to ensure that it is making its payments at an optimal time
- one method is to calculate the accounts payable days outstanding and compare it to the credit terms
What does “Stretching the Accounts Payable” mean and what is its impact?
1.
2.
3.
- when a firm ignores the payment due period and pays later
- doing so reduces the direct cost of trade credit because it lengthens the time that a form has use to the funds
- suppliers may react to a firm whose payments are always late by imposing terms of cash on delivery (COD) or cash before delivery (CBD)
What is COD and CBD?
Cash on delivery
cash before delivery
Inventory Management | Why is it important?
1.
2.
- inventory helps minimize the risk that the firm will not be able to obtain an input it needs for production | if firm holds too little inventory, stock-outs (running out of goods) may occur, leading to lost sales
- firms may hold inventory because factors such as seasonality in demand mean that customers purchases do not perfectly match the most efficient production cycle
What does Stock-Out mean?
1.
2.
- if a firm holds too little inventory, stock outs may occur, which leads to a loss of sales
- i.e. the situation when a firm runs out of goods
What are the three categories of direct costs associated with inventory?
1.
2.
3.
- acquisition costs - the costs of the inventory itself over the period being analyzed (usually a year)
- order costs - total costs placing an order over the period beinf analyzed
- carrying costs - these cost include storage costs, insurance, taxes, spoilage, obsolescence, and opportunity cost of the funds tied up in the inventory
- Minimizing total costs involves…
- e.g.: if we assume no quantity discounts are available, the lower the level of inventory a firm carries…
… come trade-offs.
… the lower its carrying cost, but the higher its annual order costs, because it need to place more orders during the year
