Financial Planning and Short-Term Financial Decisions Flashcards
What are the main differences between long-term financing decisions and short-term financial decisions?
Long-term financing is not continuous (segregated by projects) and follows a strategic orientation, while short-term financing is more continuous and are associated with business dynamics.
Regarding current asset investment, what is the trade-off mainly between?
The trade-off is between carrying costs (a larger inventory leads to higher carrying costs) and shortage costs (Costs of missing orders because there is no inventory)
What areas are included in the decisions regarding short-term financing?
-Liquidity management;
-Trade credit and receivables management;
-Inventory management;
-Short-term financing.
In what consists liquidity management?
Coordination of collection and payment and use of financial instruments in order to preserve the capacity to meet financial obligations.
What are the main steps to make liquidity management effective?
-Prepare cash-flow budgets;
-Ensure liquidity levels;
-Ensure the use of all excess cash resources;
-Activate efficient short-term financing solutions regarding the cost of capital and flexibility of financing;
-Measure and control risks;
-Control daily cash-flows;
-Build balanced contractual relationships with providers of funding;
-Gather relevant information about movements of current assets and short-term debts.
What are the reasons to hold cash and liquid deposits?
-Transaction motives (like ensure payments);
-Collateral - minimum cash reserve (banks may ask for this to cover some of the risk);
-Speculative motives;
-Preventive motives - reserves for financial stability;
-Saving of transaction costs or costs with short-term financing.
Why is the working capital management important?
Because it requires the efficient use of current assets and short-term liabilities over the company’s business cycle, and better understanding of the dimention of the cash management problems and the liquidity risk.
What is the main cost from holding cash and liquid deposits?
Opportunity costs - the company could’ve been getting returns instead.
How can we get the optimal amount of cash reserves?
Through a trade-off between reasons to hold and costs from holding cash and liquid deposits.
What regards trade credit and receivables management? (Why do companies give credit)
Conditions to offer to clients in businesses where sales depend on it, in order to maximize the commercial benefits of trade credit policy and contain costs associated with it.
In conceding credit, what are the financial effects and risk for the firm?
The company accepts to postpone the collection of their sales, which might lead to opportunity costs and the non-availability of these funds. Also, the clients might fail to pay their debts and the company will have to assume thoses losses.
What are the necessary components of trade credit policy?
-Terms of sale - Cash or credit? pp discount? Credit period?
-Credit analysis;
-Collection policy - collection department or outsourcing?
What are the possible factors that affect the credit period granted?
-Degree of deterioration of goods - +deterioration-credit period
-Consumer demand -> +demand-credit period
-Cost, profitability and standardization -> -price and -profitability -credit period
-Credit risk
-Dimension of receivables account
-Competition
-Nature of clients
What are the different credit instruments?
-Invoice
-Promissory
-Letter of credit
What factors should we take into account when analysing for credit?
The effects it will have in cash inflows, on costs, the probability of default and the value of cash payment discount
