Financial Management Flashcards
inventory conversion period (icp)
average inventory/cost of sales per day
receivables collection period (rcp)
average receivables/ credit sales per day
payables deferral period (pdp)
average payables/ purchases per day
cash conversion cycle (ccc)
ICP+RCP-PDP
speculative balance
fund to take advantage of special business opportunities
precautionary balances
amounts that may be needed in emergency situations
treasury bills
short term obligations by the us with lives under 2 year. These are zero coupon form and pay no formal interes so they trade at a discount at maturity
treasury notes
obligations with initial lives between 1 to 10 years. Interest paid semiannually
treasure bonds
notes with lives over 10 years
treasury inflation protection securities (TIPS)
treasury notes and bonds that pay a fixed rate of interest but with principal adjusted semiannually for inflation
federal agency securities
offerings that may or may not be backed by the full faith and credit of the us and don’t trade as actively as treasuries but pay slightly higher rates
Economic order quantity (EOQ)
square 2AP/S
A=annual demand in units
P=cost of placing an order or beginning a production run
S=costing of carrying one unit in inventory for one period
Reorder point
average daily demand x average lead time
Safety stock
maximum daily demand x maximum lead time - reorder point
Just In Time Purchasing
Costs Reduced Through:
reduction in inventory quantities
elimination of non value adding operations
most appropriate when order cost low and carrying cost hight
Requires high quality control standards:
efficient system minimizing defective units
corrections made as defects occur
fewer vendors and suppliers
Problems with JIT system
difficult to find suppliers able to accommodate
high shipping costs due to smaller orders
potential problems due to delays in deliveries
May use back flush approach:
all manufacturing costs charged to cogs
costs allocated from cogs to inventories at reporting dates
prime rat
rate that the lender charges its creditworthy customers
london interbank offered rate (libor)
when the borrower and lender are in different countries, the base used will typically be the libor rather than the prime rate
Debt covenants
restrictions
debentures
unsecured bonds
callable bonds
the borrowing firm may force the bondholders to redeem the bonds before their normal maturity
stated rate
fixed interest payment calculated form the FV of the bond. AKA coupon rate, face rate or nominal
Current yield
find interest payment divided by the current selling price of the bond.
Trading at a discount
rate will be higher than the state rate
Trading at a premium
rate will be lower than the stated rate
Yield to maturity
interest rate at which the pv of cash flows of interest and principal will equal the current selling price of the bonds. AKA effective rate or market rate
zero coupon bond
bond that makes no interest payments at all and only pays the fv on the date of maturity. always sells at a discount
Floating rate bond
interest payments is not tied but fluctuates with some general index of interest rates
Registered bond
bondholders name is registered with the firm, and interest payments are sent directly to the registered owner
Junk bond
pays much higher than normal interest, since it is issued by a firm that has a poor credit rating
Common Stock Advantages and Disadvantages
Advantages:
has no specific obligation to pay investors
increased equity reduces the risk to lenders and reduces borrowing costs
Disadvantages:
insurance costs are greater than for debt
ownership and control must be share with all shareholders
dividends are not tax deductible
shareholders receive a higher return than lenders
operating leverage
% change in operating income/ % change in unit volume
higher fixed costs mean more risk when revenues are below expectations
profit grows rapidly relative to revenue increase due to lower variable costs
Financial leverage
% change in earnings per share/ % change in earnings before interest and taxes
higher debt means higher interest and principal obligations for prepayment
Debt financing costs less than equity financing and doesn’t increase with greater performance
horizontal merger
when a firm acquires another in the same line of business
vertical merger
when a firm acquires another in the same supply chain
conglomerate merger
when a firm acquires another in an unrelated line of business
Balanced scorecard
Financial-return on investment and related financial measures
Customer-nonfinancia measures of customer satisfaction and retention
Internal business processes-measures of operating effectiveness and efficiency including financial measures, such as cost variances and non financial measures such as a number of defects in production
Learning and growth- measures of employee satisfaction training, and advancement
The components of a balanced scorecard include:
Strategic objectives Performance measures Baseline performance Targets Strategic initiatives
ROI
net income/total assets
Dupont return on investment
return on sales x asset turnover
Return on sales
net income/sales
Asset turnover
sales/total assets
Residual income
operating profit - interest on investment
Economic value added (EVA)
net operating profit after taxes (NOPAT)- cost of financing
cost of financing
(total assets-current liabilities) x wacc
Free cash flow
NOPAT + depreciation + amortization - capital expenditures - net increase in working capital
Business Process Management
-Design: identify existing processes/possible improvements
-Modeling: what if analyses
-Execution
install new software, test, train implement process
-Monitor with performance stats
-Optimize
use performance statistics to identify bottlenecks
consider strategies to remove bottlenecks
-Other Techniques
reengineer
lean manufacturing
theory of constraints
-Workflow analysis: focus on eliminating non value added activities
gross margin
gross profit/ net sales
operating profit margin
operating profit/ net sales
return on assets
net income/ average total assets
return on equity
net income/ average common shareholders equity
receivable turnover
net credit sales/ avg. ar
inventory turnover
cogs/ avg inventory
Inventory conversion period
avg inventory/ avg cogs per day
fixed asset turnover
sales/average net fixed assets
total asset turnover
sales/ average total assets
current ratio
ca/ cl
quick ratio
quick assets/ current liab
quick assets
cash + marketable securities + ar
debt to total assets
total liabilities/ total assets
debt to equity ratio
total debt/ total equity
times interest earned ratio
earnings before interest and taxes/ interest expense
price/earnings ratio
common stock price per share/earnings per share
book value per share
common stock equity/ common stock shares outstanding
market/book ratio
common stock price per share/bv per share
market capitalization/ common stock equity
internal benchmarking
similar operating within the org
competitive benchmarking
direct competitors
functional benchmarking
industry averages
generic benchmarking
overall averages of all business enterprise
pareto principle
an attempt to focus on the small number of significant quality issues, based on an estimate of 80% problems come from only 20% causes
six sigma
99.9997% meet quality standards.
kaizen
japanese art of continuous movement; emphasizes identification by all members of small improverments
delphi
separate consultations with multiple experts and tabulation of recommendations
Prevent costs
prevent product failure
use high quality material
inspect production process
train employees
maintain machines
Appraisal or detection costs
detect product failure before production is complete
inspect samples of finished goods
obtain info from customers
Internal failure costs
detect product failure after production but before shipment to customer
scrap resulting from wasted materials
reworking units to correct defects
reinspection and resetting after rework
external failure costs
defective product sent to customer
warranty costs dealing with customer complaints product liability marketing to improve image lost sales
Effective project management
resources
time
money scope
project initiation
support of manangement
project management with authority
project charter
project planning
define scope
identify resources needed
schedule tasks
identify risks
project execution
managing work
directing team
project monitoring and control
tracking progress
comparing actual outcomes to predicted outcomes
gantt chart
bar chart that illustrates the scheduled start and finish of elements
projet evaluation and review technique (pert)
focus on interdependency of activities and time required to complete a project
abc analysis
tasks are perceived as being urgent and important
tasks are important but not urgent
tasks are neither urgent nor important
