Financial Management Flashcards
Managing inventory & receivables (current assets & liabilities)
Financial Management
NWC : Current Assets - Current Liabilities
Financial Management
Shorten the cash conversion cycle
Don’t negatively impact operations
Financial Management
Average time needed to convert materials into finished goods and sell them
Average Inventory : (BI + E) / 2
Inventory Conversion Period : Average Inventory / Sales Per Day
Financial Management
Average time needed to collect A/R
RCP : Average Receivables / Credit Sales Per Day
Financial Management
Average time between materials and labor purchase and their A/P payment
Average Payables : (BP + EP) / 2
Payables Deferral Period : Average Payables / (COGS/365)
Financial Management
Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)
Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
: Cash Conversion Cycle
(Inventory Really (-Pays) Cash)
Financial Management
Liquid
Safe
Financial Management
Used for importing goods.
Issued by importer’s bank.
Financial Management
No interest cost if paid timely.
Financial Management
Customer Payments are sent to a bank-managed PO box.
Employees don’t have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don’t- lockbox is not beneficial)
Financial Management
Time it takes to mail a payment and have it clear your bank account
Maximize float on cash payments
Minimize float on cash receipts
Financial Management
Regional bank sends enough cash to cover daily checks
Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances
Financial Management
Treasury Bills: Short term (less than one year) Think: $1 Bill
Treasury Notes: Medium term (less than 10 years- more than 1)
Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money
Financial Management
Similar to T-Bill- but issued by corporations instead of Government
Greater than 9 Months Maturity
Unsecured
Issued by large firms
Financial Management
Advantages: Financing at less than Prime. No compensating balances required.
Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.
Financial Management
The order quantity that minimizes inventory costs.
EOQ : Square Root of (2DO/C)
D : Unit Demand (Annual)
O : Order Cost
C : Cost of Inventory
Financial Management
The cost of keeping inventory.
Financial Management
Cost of executing an order and starting product production.
Financial Management
How low inventory should get before it should be re-ordered.
IOP : Average Daily Demand x Average Lead Time
Financial Management
Orders inventory so that you get it just in time for when it’s needed
JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
Financial Management
Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection
Financial Management
Buyer saves if paid early
Example: 1/10 Net 30
1% Discount if paid within 10 days
If not- bill is still due in 30 days
Financial Management
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
Financial Management
