E-Finance CH5 Flashcards
What is working capital management
Simutaneous management of CA and CL
What is cash management
Management of cash collection and distribution
Basic principles of cash management
- Accelerating cash inflows
- Delaying cash outflow
- Matching the timing and amount of cash inflows and outflows
How to accelerate cash inflow
- Shorten collection float
- set up payment collection centre in cities where time for delivery can be reduced
- shorten clearing time for cheques receieved by depositing before the bank’s cut off time - Encourage payment in cash
- issue membership cards which allows customers to get points in exchange with other benefits
- provide express checkout counters for cash payment
Ways to delay cash outflow
- set up distribution centres in remote areas
- Pay on friday so cheques can’t be deposited and cleared over the weekend
- Pay at the end of credit period
Ways to match the timing and amount of cash inflow and outflow
Forecast future outlfow by budgeting
What is account receivable policy
Concern on how account receivable is formulated
What are the different account receivable policies aka the credit policy
- Credit standards
- Credit terms
- Collection policy
What is credit standards and the major factors (bank) considers before granting credit
the minimun level of creditworthiness in order to obtain the credit
- Capital
- Character
- Capacity
- Collateral
What is credit terms
repayment conditions for purchasing goods on credit
e.g credit period, cash discount, cash discount period
What is collection policy and it’s actions
Actions for collecting overdue account receivables before bad debt
can:
- send friendly reminders
- send warning letters
- visit customers office
- employ collection agency
- take legal actions
What are the factors affecting formation of account receivable policy
Sales, profitability and liquidity
What are the effects of granting trade credit
Increase sales
- more attractive for those who can’t afford
Decrease profitability
- may not be able to collect
Decrease in liquidity
- don’t receive cash immediately
What are the effects of lowering the credit standards
Increase sales
- moe attractive
Uncertain profitability
- expected bad debts
- sales increase but loss from bad debts and opportunity cost of investment in account receivable increases
Decrease liquidity
- customers with lower credit worthiness can also obtain credit
Effect when credit period is longer
Increase sales
Decrease liquidity
- more will pay later
Uncertain profitability
-taking longer time to pay can mean that they are financially unstable so there is a chance of creating bad debt
- Increase sales but loss from bad debt can neutralize
Effect of high cash discount
Increase sales
Increase liquidity
Uncertain profitability
What is account receivable management
Governs the procedures for making credit purchase and repaying decisions on whether to repay early and take cash discount or give up cash discount to have more cash in hand
Factors affecting formulation of accounts payable policy
Borrowing rate and cash discount
if borrowing rate > annual rate of cash discount, dont taake the discount
if vise versa, take.
What is inventory management
Management of raw materials, work in progress and finished goods
What is the economic order quantity
aim to find optimal order quantity that minimizes inventory cost
What are the two types of inventory cost
- Ordering cost
- Carrying cost
Formula of total ordering cost
fixed cost/ ordering cost x ( annual demand for goods)/ ( quantity)
Formula of carrying cost
carrying cost x (order quantity/ 2)
Formula of EOQ*
SQUARE ROOT 2x annual demand x fixed cost/ carrying cost
Formula for re-order level
(daily usage x no. of days to deliver) + safety stocks
