Financial Management Flashcards
Cash conversion cycle
Time it takes when firm makes payments to collects cash
Ways cash conversion cycle is analyzed
Inventory conversion
Receivables collection period
Payables deferral
Inventory conversion period =
Average inventory divided by
Cost of goods sold per day*
Receivables collection period =
Average receivables divided by
Credit sales per day
Payables deferral period =
Average payables divided by
Cost of goods sold/365
Cash conversion cycle =
Inventory conversion period + Receivables conversion period - Payables deferral period
Effective capital management involves
shortening the cash conversion cycle without effecting operations
A firm should
minimize the amount of cash on hand
A firm should also maintain a sufficient amount of cash on hand to
(1) take advantage of trade discounts, (2) maintain its credit rating, and (3) meet unexpected needs.
Why do firms hold cash
Transactions - conduct business
Financial institutions require minimum balances - for certain levels of service & loan agreements (compensating balances)
Firms prepare cash budgets to have enough cash to
1) get cash discounts
2) maintain credit rating
3) speculative balances - acquisitions
4) precautionary balances - emergencies/downturns/disasters
What is effective cash management for Float
Extending Float for disbursements
Shortening Float for Cash receipts
Advantages for Zero Balance accounts
Checks takes longer to clear
Do not need to deposit extra cash in account
Cost effective if interest savings from longer float covers additional fees
What are the advantages to a Lockbox system
Increased control over cash (bank handles cash)
More timely deposits (less contingent cash on hand)
What is the concentration banking process
Customers make payments at a local branch NOT main office
Branch makes deposit
Funds are periodically transferred back to main bank
